After several years of unprecedented volatility in wood products markets, 2024 experienced a more stable, albeit depressed, environment for wood products demand and prices.
The brunt of the industry pain was felt by the softwood lumber market, which saw over 3 billion board feet (BBF) of closures last year after almost 2 BBF was shuttered 2023 — a reduction of about 7% of the industry’s capacity base over two years — as prices dragged along at unsustainable levels. Meanwhile, panel mills have been able to manage supply more effectively, keeping prices elevated above pre-pandemic levels and margins healthy, unlike softwood lumber.
However, the tides are changing on many fronts as we enter 2025. An evolving supply picture, shifts in interest rates and looming policy changes as President Trump enters his second term have the potential to break the wood products market out of this sleepy period weighed down by soft demand conditions.
So, what does our crystal ball suggest awaits the North American wood product market in 2025? Below are five key predictions that we believe will drive the market this year.
Lumber prediction 1: Interest rates will fall as the economy cools and policy uncertainty eases
At the moment, it seems the fate of the housing market in 2025 is at the mercy of interest rates. As we discussed in last year’s Predictions Viewpoint, employment remains a critical prerequisite for shelter demand and home improvement spending to grow steadily. But given the degree that mortgage rates have risen and remain elevated with no compensating correction in home prices, housing affordability continues to be the preeminent headwind holding back construction activity.
The Fastmarkets view on housing is that the interest rate environment, while painfully high at the moment, should reverse course and continue to ease through 2025, providing a shot in the arm for home buying and construction finance.
Uncertainty regarding potential government policy shifts with President Trump entering office seem to be the root cause of the rise in rates since November as bond markets price in more growth and/or inflation ahead for the US economy. Prospects of deregulation, tax cuts, tariffs and a program of mass deportation of illegal immigrants are all fueling the surge in the 10 year which touched 4.8% less than a month ago, the highest levels seen since the fourth quarter of 2023.
However, we suspect that many of the pro-growth initiatives — namely tax cuts and deregulation — will be far more muted given the extremely thin majority for Republicans in the House of Representatives that will make the legislative process fractious and unproductive. Indeed, the more purely inflationary polices revolving around tariffs and mass deportations are within the existing authority of the executive branch. But we anticipate heavy lobbying by pro-business groups and a general aversion within the incoming administration to see the economy or stock market shrink will result in watered-down versions of the policies on the table. The expanding growth and “chaos” premium in bond markets should subside in the months ahead as the policy outlook becomes clearer.
On top of this, while macroeconomic data appears solid, jobs data is more conflicted, suggesting a cooling labor market which the Federal Reserve will have to reckon with when balancing its dual mandate of targeting inflation and maximum employment. While outright layoffs remain scarce according the Census JOLTS report, hiring rates are slow and frictional unemployment continues to stretch longer. We believe the Fed will be forced to address this looming risk to the economy in the months ahead, particularly if employment starts to slip in some of the more cyclical, rate-sensitive parts of the economy like construction and manufacturing.
Finally, our optimism on interest rates improving further into 2025 reflects ongoing dynamics in the mortgage market itself: namely spread compression on mortgage rates continuing against the broader market as rate volatility subsides and the Federal Reserve’s pullback from purchases of mortgage-backed securities is less meaningful. Even if the 10-year Treasury rate has limited downside going forward, we still have room for further drops in mortgage rates to achieve normalization with pre-pandemic spreads.
Despite current pain around the direction of rates, we believe we’ll see more positive news in the coming months; the fundamentals point to interest rates falling, not rising, in the months and quarters ahead, which will be a relief for shelter demand.
Lumber prediction 2: Wood products demand will rebound as single-family housing starts growth remains positive and R&R reaccelerates
The housing market experienced a significant divergence in activity over the course of 2024. The new side of the market experienced a relatively solid year in the face of high mortgage rates. Single-family home builders continued relying on incentives such as interest rate buydowns to augment affordability and keep inventory moving. Home sizes continued to decline as builders sought the growing but challenged first-time buyer market. With less inventory and no rate relief on the resale side, existing home sales sat at a new record low, even as new sales managed to squeak out a small increase.
While uncertainty is high at the moment, if our view on rates and Trump administration policy plays our as laid out in Prediction 1, we believe 2025 to some degree will be a repeat of 2024: mortgage rates hovering above 6% stifling affordability and demand but keeping prices high. Any rate relief will come again from the new side of the market where builders have some wiggle room on rates via incentives. That underlies our assumptions on another year of growth in single-family construction, where many buyers may find that is the only game in town in terms of affordability. But multifamily will continue to have some trouble gaining traction, as a continuation of the high rate environment makes financing projects a challenge.
We expect interest rates to fall, the labor market to remain strong and builders to continue offering incentives. We expect single-family starts to reach 1.14 million units, with total housing starts rising by 4%, as multifamily construction remains stagnant after significant declines in 2024. However, unlike in 2024, we believe the risks are skewed to the downside should mortgage rates stay high or if the labor market experiences sustained weakness. That said, the ongoing effects of structural underbuilding from the Great Recession continue to influence the market, and recent, more robust demographic estimates from the Census highlight the growing demand for additional housing production.
And how does the repair and remodeling (R&R) picture look? Activity as measured by our Fastmarkets Repair & Remodeling Index (RRI) suggests that the volume of activity in the space remains subdued by high interest rates and more discretionary spending because of high renovation costs and a wind-down of pandemic savings.
While the R&R market is probably in for several more months of stagnation, we believe that the market will see a reacceleration in activity as the consumer shakes off this wariness and real disposable income growth remains solid despite some headwinds on job growth. We anticipate 1% growth in the RRI in 2025 overall, matching the pace in 2024. The first half of the year will be a continuation of the status quo with activity plodding along, but we are optimistic that there will be a positive momentum shift in the second half of the year.
Where does this leave wood products demand for the year? The risks to the outlook are numerous at the moment, so we acknowledge that we are sticking our necks out at a precarious pivot point on multiple policy points, but as laid out above, demand across the major wood products markets appears to be set up for modest growth. US consumption of lumber, structural panels (i.e., oriented strand board (OSB) and softwood plywood) and nonstructural panels (particleboard and medium-density fiberboard (MDF)) are all forecast to advance by 2-3%, which will be a welcome development after several consecutive years of declining growth in most categories.
Lumber prediction 3: Duties on Canadian softwood lumber will double again, placing immense financial pressure on Canadian sawmills
As earlier noted, sawmill closures in North America have been a major theme of the market since 2023. Declining demand and prices have, of course, been the core driver of the wave of closures we are now seeing, but further aggravating the pain being felt are onerous duties on Canadian lumber shipped to the US. In August, the US DOC announced its final duty determinations based on its fifth annual review (AR5), raising the average combined countervailing and anti-dumping duties from 8.1% to 14.5%. At prevailing market prices, Canadian mill operators in the summer were largely underwater on cash costs, which has been clearly reflected in company earnings this year.
The situation continues to look worse for Canadian mill operators next year as the AR6 is underway and investigating subsidies and dumping in 2023, a year when prices were well below production costs for many Canadian sawmills. Based on our latest analysis of Canadian production costs and market prices in 2023, we believe that average duties will double to 30% in summer 2025 when the final assessments are announced. This would be the highest combined duty levels the industry has seen since the expiration of the last Softwood Lumer Agreement (SLA) in 2015.
Higher duty assessments will raise effective Canadian mill breakevens, curbing even more supply shipped to the US and driving prices even higher just as demand is likely set to rebound. This will add substantial upward pressure on prices of Western species in 2025 as most Canadian operators will not be viable at price levels of $400-499 per MBF. US producer share gains will accelerate this year as Canadian mill operators grapple with a major hit to their competitiveness in the market where the majority of their volumes are shipped to.
Adding to the potential pain are tariffs on all Canadian goods on top of lumber duties as president-elect Trump threatens 25% duties on our neighbor to the north. Our baseline view is that those threats will either not materialize in actual implemented duties or will be short-lived as concessions are quickly made by Canada and other affected countries on key points of grievance with the Trump administration.
Less than a month after inauguration day, the cross-border disagreements have already roughly taken this shape, with tariffs on Mexico and Canada announced and postponed in the same day. The tone on the Canadian side has been anything but conciliatory, increasing the odds of a protracted dispute rather than a quick capitulation.
Regardless, tremendous pain awaits the Canadian industry in 2025 that could go from very bad to much worse depending how the Trump administration plays its hand with tariff policy.
Lumber prediction 4: Panel supply discipline and tight inventory levels will persist in 2025
In terms of OSB supply, 2023 and 2024 were marked by an environment where supply continued to fall behind demand. Historically, OSB production has had extended periods where supply exceeds consumption, causing significant fluctuations in pricing. However, the past two years have seen very tight markets, with a more concentrated industry leading to a more disciplined supply response to demand shifts.
Given this level of concentration, we anticipate that the strategy of maintaining tight inventory levels will continue into 2025. In 2024, the market saw two new mills begin production: the West Fraser Allendale mill in South Carolina reopened, and Martco’s expanded mill in Corrigan, Texas, which had been delayed at the end of 2023, became operational. However, we do not expect any new mills to open in 2025, despite a considerable number of greenfield facilities in development. Meanwhile, plywood remains a niche product in the wood products market, and offshore trade will continue to be the marginal supplier, as no new mills are expected in the coming year.
There have been different trends in particleboard and MDF supply over the last few years. Supply was pulled back between 2022 and 2023 in response to collapsing demand and markets have been characterized by caution ever since. Closures and accidents on the particleboard side have reduced capacity, but there have not been similar closures on the MDF side.
Still, in both cases, after overcorrecting in 2023, production volumes kept pace with demand on mills in 2024. Particleboard mill closures have returned operating rates to normal ranges, while MDF shipment volumes have been low compared with capacity. Buyers know there is excess capacity out there and have been unwilling to buy beyond immediate needs for some time now. MDF mills have managed to keep price concessions minimal in a low-demand environment.
Across the board, inventories have been low and will remain so in 2025. We do not anticipate a meaningful price correction in particleboard or MDF, and without that, it is hard to see what would spur a restocking cycle within the next 12 months. We do expect a small degree of inventory building this year but not enough to change market dynamics from the status quo. Nonstructural panel supply will keep pace with demand.
Lumber prediction 5: Lumber price volatility will increase across wood products due to tightening conditions, duties and policy uncertainty
Based on the predictions laid out above, readers can probably deduce that our price outlook points up for most wood products given the confluence of demand reacceleration, sawmill closures, rising trade duties and possibly tariffs in the coming months.
However, just as interesting to buyers and sellers alike — and probably more pertinent — will be the shifting volatility we expect to see in the market in response to these shifts in fundamentals and policy uncertainties. We believe that for most products, not only will price levels rise, but price volatility will also increase in 2025.
The evolution of wood products price volatility — the absolute dollar change in week-over-week prices for the respective composite indices reported by Random Lengths — has gone from a subdued state to 5-10 times normal during the pandemic, and is now back to relatively modest weekly fluctuations since 2023. The return to “normal” levels of volatility are tied to the consistent downward slide of demand, diminishing tension in the market and healing of the supply chain, which have all normalized from their pandemic-related disruptions.
However, we doubt the sleepy, predictable lumber and panel markets we have become accustomed to over the last 18 months will persist. While we don’t foresee Covid-era volatility returning, a scenario where volatility increases 50-100% would not be surprising given that uncertainty on the demand, supply and policy front remains as high as we’ve seen it since the pandemic. It would be a mistake to assume 2025 will be a repeat of the last two years when it comes to prices, and we advise readers to prepare for an expanded range of average weekly price moves.